Depository Receipts

Introduction

• Depository receipts are negotiable instruments, issued by a bank representing the share of a foreign company traded on a local stock exchange.
• It is a type of physical certificate through which investors can hold shares in the equity of other countries.

Features of Depository Receipts

• It allows investors to diversify their portfolios and purchase shares in foreign companies.
• Depositary receipts give investors the advantages and rights of the underlying shares, such as dividends, voting rights, and access to markets they might not otherwise have.
• Depositary receipts are more convenient and affordable than buying stocks on foreign exchanges.
• Depository receipts facilitate companies (Multinational) raising funds for business and encourage international investment. 
• The liquidity of depository receipts is low as there are not many buyers and sellers.
• The currency risk associated with the underlying shares in another nation is not eliminated by depositary receipts, such as American Depository Receipts (ADRs).

Types of Depository Receipts

• American Depository Receipts: It is a negotiable instrument or certificate issued by a U.S. bank representing shares of a  foreign company. ADR facilitates investors in the U.S. to purchase shares of overseas companies.
• Global Depository Receipts: It is a tradable financial instrument or security that represents shares of a foreign company traded on two or more global stock exchanges. 
• Note: ADR facilitates  trading of the shares of overseas companies in stock exchanges in the U.S. Only while GDR facilitates trading of the shares of overseas companies in two or more stock exchanges globally. 

Process of Issuance of Depository Receipts

• At first, to purchase a depository receipt an investor is required to communicate with a broker in a local bank (depository bank). 
• The depository bank in the investor’s home country will make an assessment of foreign security before buying the security/shares. 
• The broker in the depositary bank will procure the shares either on the local stock exchange or in the foreign stock exchange by using another broker in a foreign bank (custodian bank).
• After the procurement of the shares, the depositary bank will ask the shares to be delivered to the custodian bank.
• After receiving the shares by the custodian bank it will be issued to the depositary bank as a depositary receipt that is traded on the bank’s local stock exchange.
• After that, the broker will deliver the shares to the investor.